Foreign Trade
Foreign Trade is the exchange of goods and services between two countries in the international market. It helps in the availability of raw material/finished product in a country that either does not have it or has it in scarcity. No country is self-sufficient in terms of natural or man-made resources,, so it is prudent to approach other countries that have them in abundance.
Types of Foreign Trade
There are three different types of foreign trade, which are as follows:
- Import trade: It is the purchase of goods and services by one country from another country. Here the flow of goods is from a foreign land to the home nation. Countries import goods and services when they need raw materials for producing goods or when they need a finished product for domestic consumption.
- Export trade: It is the selling of goods and services to another country. Here the flow of goods is from the home nation to a foreign land. Countries export goods and services to another nation when they have that particular commodity in abundance.
- Entrepot trade: This process is also called re-export. In this form of trade, a business purchases goods or services from one country, reprocesses those products, and then sells them to another country.
Benefits of Foreign Trade:
Foreign Trade has many benefits for all the countries involved in it. Some of the advantages of exchanging goods in the international market are as follows:
- Foreign Exchange: Foreign Trade helps countries get access to foreign currency and boost up their reserves. This currency is essential when it comes to paying for imports of goods and services.
- Consumers get more options: People from one country enjoy superior quality goods and services from other nations. They would not have gained access to these products were it not for International trade. These products can also help them improve their standard of living in the long run.
- Optimum use of a nation’s resources: No country can fulfil all its consumption needs independently. They have to depend on other nations for specific products. International trade allows them to procure raw materials/finished products that they don’t have. It helps countries focus on producing what they are good at and help increase efficiency in the production process of those products.
- Economic Benefits: International trade generates employment opportunities for organisations and countries involved in the export/entrepot of goods and services. It also helps to improve the Gross Domestic Product for that country.
Foreign Investment
Foreign Investment is the inflow of capital into a country through individuals/institutions from a different country. The flow of capital is from one organisation, with its headquarters in a foreign nation, into another company that belongs to the home nation. The investment helps companies based abroad to set up their offices or manufacturing units in another country. Since the foreign entity gets a stake in the domestic company in exchange for providing capital, they have to follow local government rules and regulations regarding such investments.
Types of Foreign Investment
There are three different ways in which a company belonging to one country can invest in another country. These methods of investment are as follows:
- Foreign Direct Investment: This type of investment involves a foreign company infusing capital into another country’s business or production units.
- Foreign Portfolio Investment: When an organisation based outside the country invests in the securities market of that country, it becomes a foreign portfolio investment.
- Foreign Institutional Investment: This is a form of investment by a foreign-based company in the passive holdings of an entity in another country.
Benefits of Foreign Investment
The main advantages of foreign investment are as follows:
- Economic growth: Infusion of foreign capital helps domestic companies increase production and generate employment. It can also boost consumption in the market since the workforce in those companies will have greater purchasing power. It contributes to the overall growth of a country’s economy.
- Resource transfer: Foreign investment brings capital and helps the domestic workforce get access to new technologies and skills. It will help in improving their productivity while also developing the quality of goods and services produced.
- Cost benefits: Foreign investment can help domestic companies improve production efficiency and reduce costs via access to better technologies.
Differences between Foreign Trade and Foreign Investment
The main differences between Foreign Trade and Foreign Investment are as follows:
Foreign Trade | Foreign Investment |
Meaning |
It involves the exchange of goods and services between two countries in the international market. | It involves the investment made by a foreign company into another company based in a different country. |
Purpose |
The main purpose of foreign trade is as follows: - To help countries access goods and services that they need from international markets.
- To sell their products in those markets and earn foreign exchange.
| The primary purpose of foreign investment is as follows: - Gain access into the market of another country by providing capital and getting a stakeholding in a local company.
- Use that access to conduct business and make profits.
|
Benefit |
Access to international markets for domestic companies. | Access to long term capital to a company via foreign investors. |
Flow of resources |
Foreign trade enables both inflow and outflow of raw materials/finished products between countries. | The foreign investment enables the inflow of capital and technologies into a country from abroad. |
Types |
The three types of foreign trade are as follows: | The three types of foreign investment are as follows: - Foreign Direct Investment
- Foreign Portfolio Investment
- Foreign Institutional Investment
|
Conclusion
There are important differences between Foreign Trade and Foreign Investment, but both are essential to improve the economy of a country. A country needs to use both these economic tools to their advantage.
Also See
- Difference between internal trade and external trade
- Difference between investment and foreign investment
FAQs
Foreign trade refers to the buying and selling of goods and services between countries. Foreign investment refers to the purchase of assets, such as stocks and real estate, in a foreign country by an individual or business.
What are the differences between foreign trade and foreign investment? ›
Foreign trade involves goods, services, and capital between two countries. Foreign investment is an investment made in a company from a source outside the country. Integration of markets from different countries. Additional investment in the form of capital, technology, and other resources.
What is the difference between trade and foreign trade? ›
Home Trade occurs within one country, while Foreign Trade involves transactions between multiple countries. Other distinctions include transportation costs, documentation requirements, time gaps in transfer and payment, and the importance of credit scores.
How is foreign direct investment different from trade? ›
Foreign investment involves capital flows from one nation to another in exchange for significant ownership stakes in domestic companies or other assets. International commerce is trade between companies in different countries, or just trade between different countries.
What are the 2 types of foreign investment and what is the difference between them? ›
Foreign direct investments are when investors purchase a physical asset such as a plant, factory, or machinery in a foreign country. In contrast, foreign indirect investments are when investors buy stakes in foreign companies that trade on their respective stock exchanges.
What is the difference between foreign investment and investment? ›
The money that is spent to buy assets such as land building machines etc. is called investment whereas investment made by a MNC to buy such assets is called foreign investment.
What is the relationship between foreign investment and trade? ›
FDI and trade are different but related types of transactions that play fundamental roles in the global economy. Foreign direct investment (FDI) and international trade are both drivers of the global economy, facilitating the cross-border transfer of goods, services and capital around the world.
What is foreign trade in short answer? ›
Foreign trade is the trade between one country and the other countries. Goods sent from one country to the others are called Exports. Goods that a country gets from other countries are called Imports.
What are two examples of foreign trade? ›
Almost every kind of product can be found in the international market, for example: food, clothes, spare parts, oil, jewellery, wine, stocks, currencies, and water. Services are also traded, such as in tourism, banking, consulting, and transportation.
What is the difference between foreign trade and economic growth? ›
International trade is defined as the exchange of goods and services across international territories. On the other hand, economic growth is defined as an increase in the market value of services and goods produced in a country within a specific period, adjusted for inflation.
Foreign investment refers to the investment in domestic companies and assets of another country by a foreign investor. Large multinational corporations will seek new opportunities for economic growth by opening branches and expanding their investments in other countries.
What is an example of a foreign investment? ›
An example would be McDonald's investing in an Asian country to increase the number of stores in the region. Here, a business enters a foreign economy to strengthen a part of its supply chain without changing its business in any way.
What is the role of foreign investment? ›
Foreign investment can help boost economic development by providing the necessary capital and resources to finance new projects, expand existing ones, and modernize infrastructure. This can lead to increased productivity, job creation, and overall economic growth.
What are the disadvantages of foreign direct investment? ›
Disadvantages of Foreign Direct Investment
One of the main concerns is the potential for exploitation and loss of control by the host country. When a foreign company invests in a local business, it may have significant control over the operations and decision-making processes.
What attracts foreign investors to a country? ›
Freedom—political, legal, and economic—is a crucial factor in attracting FDI and fostering economic growth. As we've seen, regions with higher levels of freedom tend to receive more FDI, driven by strong legal frameworks, well-defined property rights, and transparent governance structures.
What does foreign direct investment include? ›
Definitions. Broadly, foreign direct investment includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans.
What are the two 2 main types of international investments? ›
foreign direct investment (FDI) – where an investor sets up or buys a company (or a controlling share in a company) in another country, and; portfolio investment – where an investor buys shares in, or debt of, a foreign company without controlling that company.
What are the 2 most known types of FDI? ›
FDI can take two different forms: Greenfield or mergers and acquisitions (M&As). mergers and acquisitions amounts to transferring the ownership of existing assets to an owner abroad. In a merger, two companies are merged to form one, while in an acquisition one company is taken over by another.
What is the difference between direct and indirect foreign investment? ›
Investment by foreigner (non-resident) in an Indian entity is considered as Direct Foreign Investment. Investment by an Indian company (which is owned or controlled by foreigners) into another Indian entity is considered as Indirect Foreign Investment (IFI).
What is the difference between foreign indirect investment and FDI? ›
FDI refers to the investment made by foreign investors to obtain a substantial interest in an enterprise located in a different country. FPI refers to investing in the financial assets of a foreign country, such as stocks or bonds available on an exchange.
